Aussie Assets to Remain Strong Even If China Data Dip
Release of Chinese data is always a big risk event for Aussie assets and this week is no different, with a slew of data due from the world’s second-largest economy on Thursday. But experts say unless the data miss targets by a significant margin, the appetite for assets such as the Aussie dollar and bonds will remain strong.
As Australian assets still provide the best yield among those of advanced nations such as the United States, Europe and Japan, investors are still drawn to them, analysts tell CNBC. In addition, data from China, the biggest buyer of Australian commodities such as metals and grains, on Thursday will indicate that the government-engineered slowdown there is close to, if not at, a bottom.
These factors should support the Australian dollar , according to John Noonan, Senior Forex Analyst with Thomson Reuters in Sydney. China is releasing on Thursday data on consumer price index , fixed asset investment, retail and industrial production, and analysts have lowered their expectations for this set of data by “a bit,” Noonan said, which means a greater chance of surprise to the upside.
“There's still massive thirst for yield out there from investors, which is propping the Aussie up,” Noonan told CNBC Asia’s “Squawk Box” on Monday. “If data this week out of China is at least within the expectations, you can still see the Australian dollar stay quite strong because of that yield search. Hopefully there'll be an upside surprise.”
The Australian dollar fell to a 2012 low of 96.98 cents to the US dollar on June 1 as investors shunned risk assets, including commodities, as the global economy deteriorated. It has since strengthened and was trading at 1.0556 in early Asian trade on Monday. Aussie sovereign bonds were yielding about 3.15 percent on Monday and paper issued by individual states such as Queensland and South Australia are yielding around 4 percent.
Indeed, the hunt for yields in an environment where record-low interest rates are the norm is what’s pushing foreign ownership in Australian government bonds to record high, said Steve Goldman, Managing Director of Kapstream Capital, a fund management firm in Sydney which specializes in fixed income.
“Some of the estimates I have seen, about 75 to 80 percent of new issuances are going to foreigners, which kind of makes sense in this environment. If you look at the yields on the 10-year Aussie sovereign bond [of] about 3 percent compared to say Germany or the U.S. in the 1.4 percent range,” Goldman said. “It makes a lot of sense to go into Australia today.”
Chinese Interest in State Bonds
In a sign that more governments are keen on higher returns for their reserves, officials within the foreign-exchange arm of China's central bank, or State Administration of Foreign Exchange (SAFE), recently met with Australian regional governments to discuss buying their bonds, according to media reports.
New South Wales, Victoria and Western Australia states are all rated triple-A by the major ratings firms, while Queensland lost the top rating in 2009 and South Australia was recently downgraded by Standard & Poor's. Around A$233 ($245 billion) of central government securities are on issue, with about 80 percent of that in foreign hands.
The Australian economy also appears to be among the strongest of advanced economies, with first-quarter GDP coming in at 1.3 percent, more than double the 0.5-percent increase forecast. This works out to be an annual growth of 4.3 percent, compared with 1.7 percent in the United States, zero growth for the European Union and a fall of 0.1 percent in the United Kingdom.
Australia is among the 14 nations given the highest rating of ‘AAA’ by Standard & Poor’s.
Continuing to support the economy will be commodities, Australia’s biggest exports, which are expected to recover towards the end of the year, according to Michael Langford, Proprietary Trader with StreamTrading.com.
“I think China has hit that ground floor,” he said. “In terms of whether it’s been a soft landing or a hard landing, in terms of where the numbers are heading, you’re probably look for direction for steel production, which appears to be on trend. And from what we are seeing, demand is robust, demand is there.”
China’s economy expanded 7.6 percent in the April-June quarter, the slowest pace in more than three years, but Noonan says that Beijing’s program of policy fine-tuning such as slashing interest rates, speeding investment projects and easing rules on banks to encourage lending to fast-track the economy seems to be working.
“I do think that the Chinese authorities have done quite a bit, particularly on the fiscal side of things to suggest that they have been successful,” he said.
- By CNBC's Jean Chua.